Well, unfortunately, they are currently a reality. For many people just entering the housing market and considering buying, it’s a little easier since this is where interest rates are now and that expectation has been set. For those that were preapproved a few months ago (or last year) and did not end up buying, it’s hitting them hard because of how much rates increased.
The impact of rates increasing has translated to mortgage payment expectations being hundreds of dollars more a month. This doesn’t just affect one’s purchasing power, but also their comfort level. The housing market is still going strong, but in my communication with real estate agents, we are definitely starting to see a shift in the number of offers made on a single home, as well as by how much those offers are going over asking price. A little normalcy in the market isn’t a bad thing, but it is definitely interest rates and inflation that have triggered that.
My recommendation for each of my preapproved clients is to reach out to me regularly as they find homes they are interested in making an offer on. The market is volatile and finicky, and rates can change pretty drastically. I have also found that many clients are securing a better interest rate with a jumbo loan, even if they’re not in the jumbo loan range (for high-cost Bay Area counties, a jumbo loan is anything above $970,800). The reason for this is because jumbo loans are backed by investors, not by Fannie Mae or Freddie Mac, and those investors are stipulating rates based on their risk comfort level. However, jumbo has a lot more restrictive guidelines and rules, so a Fannie/Freddie loan that would be a slam dunk can be an issue with jumbo.
Another thing that some people are considering more seriously are Adjustable Rate Mortgages (ARMs). In the past many years, ARMs have not been as competitive compared to Fixed Rate Mortgages, but they are definitely making a comeback, and have consistently been about .5% lower in rate than a 30 Year Fixed. On a $1MM loan amount, this difference in monthly payment translates to over $300/month. I’ll be speaking more about ARMs and cost/benefit analysis in a future blog post.
Lastly, for those potential homeowners that make under their county’s median income limit, there can be loan programs that provide an interest rate incentive. This, however, can be a bit of a Catch-22 because if you make under the median income limit, your purchasing power is pretty limited, and there may be no houses available in your max purchase price range.
Interest rates have been so incredibly low the past couple years, and we all knew they wouldn’t last forever. I don’t think anyone in the industry was anticipating such a drastic increase in such a short amount of time, but it’s what we are up against, and if you are in the market to buy, a good thing to keep tabs on. Let me know if you have questions – I’m here to help.
